In the example below I look at a theoretical high income buyer facing a choice between two condos, with one condo having assessments that are $100/month higher than the other. Given that the buyer is only going to live there for 5 years, the question is how much more can the buyer spend on the condo with lower assessments and still have the same monthly expenses, if the mortgage rate is 5%. In addition, are there any other economic considerations?

I factored in the buyer’s tax bracket because of the deductibility of mortgage interest. The impact of the deductibility is to make mortgages more attractive relative to assessments for high income buyers than for lower income buyers. I made a few simplifying assumptions as well: that assessments and the value of the condos would go up with the rate of inflation, assumed to be 3% per year and, that for purposes of this analysis, we could just look at an average of the monthly interest and assessments.

The conclusion is that you could spend an additional $41,000 on the condo with the lower assessments, have the same monthly after tax monthly expenses, and end up with an additional $6,580 of appreciation at the end of 5 years. In other words, think long and hard before signing up for a condo with high assessments.

So I promised to take a more in-depth look at the data. Herewith is the condo index superimposed upon the single family home data, along with the trend line for single family homes.

I should first point out that these indices are normalized to 100 for January 2000, so they arbitrarily cross at that date. What you see from this graph is that condo prices have tracked pretty closely with single family prices until the bubble really took off, at which time single families went a bit higher. Subsequently, single family home prices dropped much more than condo prices until today when the single family index is below that for condos. Both indices hit a low point in April of 2009, after which they began to recover, recently they declined a bit more. Based upon this “G” suggested that the condo index has a really good chance of hitting a new bottom.

In order to gain perspective on that claim I tried a couple of different analyses. First, I looked at the historic ratio of the two indices – the single family home index divided by the condo index. Since in the long run the two classes of housing should appreciate at the same rate one would expect the ratio to fluctuate around a constant value.

The only “normal” period is from 1995 – 1998 (pre-bubble), when the ratio of the indices averaged 1.027. That’s a pretty short period in which to attempt to determine a normal ratio. After that you can see how the ratio peaked at 1.05 as single family home prices grew faster than condos and then dropped to almost .9 as they crashed faster than condos. However, even if we expect the ratio to climb back above 1 there are two ways for that to happen: either single family home prices can climb or condo prices can fall further. Given that the single family home price index is well below the trend line I would expect the former.

The other perspective I tried was to develop a trend line for condo prices. Since we don’t have much history I borrowed the single family trend line and adjusted it for the average ratio of the two indices from 1995 – 1998.

Based upon this trendline it looks like condo prices in Chicago have returned to trend. Of course, that doesn’t mean that condo prices can’t fall below trend but I can’t believe they can fall much further. While single family homes overshot on the downside, they were falling from a bit higher level than condo prices. I would also expect the two classes of housing to be subject to the same economic factors – i.e. they peaked around the same time and they both hit a low point in April. Perhaps they are climbing out of this quagmire together.

We should know a lot more in the next few months.

Months of condo inventory in December was less than half of what it was in 2008, at a 14 month supply.

This is much better than in the summer when inventory levels were actually higher than the previous year. While units on the market are down slightly, the big impact is from sales that are running at about twice last year’s level.

Meanwhile, the days on the market are also dramatically better at just under 250 days. That’s still a lot but it’s also the best level since the reporting was modified in October 2007.

As always, you can find neighborhood specific data at the following locations. A few of these neighborhoods really stick out – e.g. the Near South Side.

• Edgewater
• Hyde Park
• Lakeview
• Lincoln Park
• Lincoln Square
• Logan Square
• Loop
• Near North Side
• Near South Side
• Near West Side
• North Center
• Rogers Park
• South Shore
• Uptown
• West Town

Well, I did an analysis on Lincoln Park home values about a year ago and have been meaning to update it for some time now so this discussion finally motivated me to do it. Since “Steve” showed condo examples and since there are more condo sales in Lincoln Park than anything else I focused on condo sales – every closing in the last 30 days where prior sales data was available. This is what I found, sorted by prior sale date.

As you can see, pretty much everyone who bought a condo in Lincoln Park since April 2005 lost money in the last 30 days. (I should point out that the 1660 N LaSalle condo, shown selling at a “gain”, might very well have had substantial work done on it since being originally purchased – it’s hard to believe it gained that much value on its own.) On the other hand, eyeballing the data, the situation looks better today than it did a year ago. Homes don’t seem to have lost as much value in Lincoln Park as they were losing a year ago.

As the debate on Cribchatter did include a discussion of transaction costs and renting vs. buying, I will point out that when you take transaction costs into account the situation is even worse and renting would have been a better option during this period. However, 4 years is a pretty short time period and I would argue that, for people planning on staying in their homes for a while, they haven’t done too poorly in Lincoln Park. On the other hand, during this same time period average home prices in Chicago have fallen 15% according to the Case Shiller home price index and it doesn’t look to me like Lincoln Park has held its home values any better than the city as a whole.

Oh, one other caveat. Anecdotally, it does appear that people who bought condos in large buildings on busy streets may have gotten hit harder than those that bought in smaller buildings on quiet, tree-lined streets.

The red marker on the graph marks the spot where the new market time data begins. After calling the data provider and launching a 2 day investigation we discovered that they had just fixed an error in the way that they determine the days on the market. The result is that the market times are now shown to be much worse than we had thought but they have also been exhibiting dramatic improvements throughout the course of 2009.

You can see a similar improvement in the Chicago housing inventory, though these statistics were not impacted by the change.

Condo market times are down and inventory levels are down since the beginning of the year. The number of condos on the market is down at the same time that the number of condos sold is up.

There are probably several factors at play here. Certainly the tax credit is helping sales volume and I believe that sellers who are not prepared to price their properties properly have given up on selling – for the time being at least. Many of them just can’t afford to sell at current market levels. Some argue that this represents a shadow inventory of housing that will come back to haunt us another day. However, while I think that may prevent real estate values from rising, I don’t think it’s going to further depress Chicago housing prices because these home owners have already demonstrated an unwillingness to sell at current prices.

As always you can find our housing market statistics for several Chicago neighborhoods at the links below:

• Edgewater
• Hyde Park
• Lakeview
• Lincoln Park
• Lincoln Square
• Logan Square
• Loop
• Near North Side
• Near South Side
• Near West Side
• North Center
• Rogers Park
• South Shore
• Uptown
• West Town

Unit 1312, 1 bedroom/ 1 bath and 692 sq ft has been cut from $253,990 to $182,990. That compares with unit 1812, which sold for $182,000 at auction. Well, that’s a higher floor but let’s assume there is some room for negotiation on unit 1312 – though developers don’t usually like to negotiate.

Unit 1508, 1 bedroom +/ 1 bath and 751 sq ft has been cut from $268,990 to $199,990. That compares with unit 2008, which sold for $204,000 at auction, which seems reasonably fair – lower price for a lower floor.

Unit 2707, 2 bedroom/ 2 bath and 1259 sq ft has been cut from $490,990 to $378,990. That compares with unit 2607, which sold for $336,000 at auction. So I would not say that unit 2707 is available at auction prices. This one is much higher.

Oh…and they might want to update their MLS listings. The bulk of their listings that are showing as active were sold at auction. I think that violates some kind of MLS rule.

Let’s start with a simple approach for making that comparison, based upon an example where the difference in assessments is $100/month and your mortgage interest rate is 5%. In that case the extra $1200/year in assessments is approximately equal to the interest you would pay on an additional $24,000 purchase price ($1200/.05). In other words, for the same monthly outlay you could afford a $24,000 more expensive home or buying the home with a $100/month assessment is equivalent to spending an additional $24,000 on a home. In fact, most buyers intuitively take this into account by looking at their total monthly outlay in terms of mortgage, taxes, and assessments.

That’s the basic concept. It gets more complicated (doesn’t it always?)

First, there’s the tax benefit of a mortgage. If your marginal tax rate is 25% then the after tax cost of mortgage interest is really 3.75%. So that $100/month is really equivalent to paying an extra $32,000.

But I’m not done. It gets even more complicated. Really complicated on this round. In fact, it gets downright scary. Let’s say you believe that your assessments are going to go up because of inflation – maybe 3% per year on average. Wellllllll….now that’s equivalent to paying an extra $160,000 (1200/(.0375 – .03)!

OK. You’re not going to believe that and, while it’s accurate, it’s not totally correct so I better explain. The formula I used above is for what’s called a perpetuity. In other words, it assumes you are going to live there forever. Of course, that’s not true. In fact, you will either die (sorry, but it’s true unless you are a teenager in which case you believe you are immortal) or move before perpetuity comes. So what you really need to do is factor in the increases that will occur while you are living there using a technique called discounted cash flow, which is too complicated for me to get into right now but, in a simplified form, it’s actually the basis for all the formulas I’ve been kicking around here. Basically, it averages out the increases you are likely to experience while living in this place and it comes up with a number far closer to $32,000 than $160,000.

But here’s the point: an extra $100/month really adds up over time and the longer you live there the more of a burden it’s going to become. So think twice about buying a place with a higher assessment unless it’s a lot cheaper.

There are several interesting observations from this auction:

• You will notice that unit 500, which is a studio, actually went for more than the last list price. Regardless of what you think it was worth, we can only conclude that when this unit was on the market people were not aware of its availability. Otherwise the bidders could have bought it then for a lot less.
• I don’t show the auction sequence here but they auctioned off the higher floors first. In several instances the lower floors then went at a higher price – e.g. units 2512 and 2312. I’m thinking that either people incorrectly assumed that the higher bidders would be taken out in the earlier round or they developed remorse that they didn’t get the higher floor.
• It looks like the developer was trying to get about a $3K premium per floor. However, the auction only assigned a premium like that about half the time.
• Unit 2602 seemed overpriced relative to 1203 and in fact the auction gave it a bigger discount.
• I was surprised that the south and west views went for as high prices as they did vs. the north and east views.
• When they say get there an hour ahead of time you should if you want to get free food and good seats.

Once again, the auction is this Sunday at the W Hotel on Adams St.

The unit is priced at $399,900 plus an additional $30,000 for the parking space and the monthly assessments are $484. It is a 1659 square foot northeast corner unit with 2 bedrooms, 2 baths, and a fabulous view. You get to see a nice mix of high rises, green space, and smaller buildings.

In this photo of the living room you can see that the unit has expansive floor to ceiling windows and a steel ceiling – you don’t see too many of those.

The kitchen island has a polished concrete counter top with a swerve design embedded, supported by a metal pipe – one of the many interesting architectural details in this unit.

The master bedroom has a partially dry-walled ceiling to break up the monotony and you can also see two other unique design elements. All the HVAC ducts are flattened as opposed to the standard circular shapes seen in almost every other loft. And on the left side of the picture you can barely tell that the bathroom door hangs from a metal bar above the doorway and rollers allow it to glide across. I can’t remember if there are multiple types of doors in the unit but I do remember that the front hallway closet door is made of a heavy metal screen.

Check out the interplay of several unique design elements in this master bathroom: mosaic tile wall, circular mirrors, high neck faucets, single wide basin sink, and a vanity supported by a metal pipe.

There are two things people might not like about this unit: 1) The balconies are bright yellow and 2) the ceilings are unfashionably low – not the 17 feet that seems to be irrationally popular. In particular, the clearance can be a bit tight when standing under the duct work. Nevertheless, I think this place is way cool!

The unit is listed by Keller Williams and has been on the market for 90 days now.